How Will That Affect The Rest Of The Family If It Is Not Paid Back? Document Your Intentions.

Parents give or lend money to children for many reasons: to buy a first home, to start a new business, or to help them with a debt or other financial liability that they can’t seem to handle themselves. It is important to consider the impact that the loan or gift will have on the rest of the family when you, the lender, have passed away. Will the family view it as a debt requiring repayment, as a gift to be deducted from the recipient’s inheritance, or as a gift made in addition to the recipient’s inheritance. Documenting your intentions will be very beneficial to family unity and harmony.

In some families, adult children recognize that some of their siblings are more capable of living financially independent of the parents than others. In those families, when the parents die, and money received by a sibling has not been repaid, the siblings do not care – or at least they don’t seem to care - when it comes to dividing up the estate.

In other families though, it can be a very, very sore point-of-contention if the sibling has not returned the money. Some in the family say it was a loan, the sibling who received the money says it was a gift – and where is the truth?

When paying money to children, it is important for parents to document the their intentions and expectations.

If money paid to a sibling is intended to be a gift with no expectation of repayment, that should be documented.

If the money is a gift that is to be deducted from the recipient-sibling’s inheritance, that should be documented.

If the money is intended as a loan, that should be documented (with a promissory note signed by the recipient) to show the terms of the loan such as repayment schedule, interest rate and, if the debt goes unpaid, whether the balance should be deducted from the borrowing-child’s inheritance. As to a promissory note, it is a good idea to keep a copy of the promissory note, signed by the borrower, with your will, living trust, and other estate planning documents.

There are income-tax implications associated with loans. If the loan is to be interest bearing, then the IRS imputes a minimum interest rate that must be charged. The imputed interest (aka “applicable federal rate") is usually less than the “market" rate charged by commercial lenders. In any event, interest and the income taxes attributable to the lender are things that should be discussed with your attorney or other tax advisor.

If the documentation clearly shows that the payment of money to the child is really a gift, and that there is no expectation of repayment, then there may be gift tax implications. Again, check with your tax advisor regarding the consequences.

The other form of documentation that is advisable, and I might go so far as to say “essential”, is that parents update their wills and trusts to show what their expectations are in the event that the money is not repaid prior to the parents’ death. It is fairly simple to amend a trust, or prepare a codicil to a will, that states that either the amount of money that was given to the child was intended to be a gift with no expectation of repayment, or that there was an expectation of repayment.

In the situation where there is no expectation of repayment, then it is considered a gift but the question becomes whether the parents intended it to be an “advancement” against the child’s ultimate inheritance, and thus deducted from the inheritance, or whether it was not to be deducted. Some parents include a provision in their will or trust that says that the amount of money to a child was, for example $50,000, and that it was not intended to bear interest and, further, whatever portion of that balance is not repaid by the time of the parents’ death will be deducted from the child’s inheritance.

Documenting these types of things can go a long way to preserving family harmony and unity.

Conversely, overlooking these types of details can go a long way toward fragmenting and dividing the children in terms of how they feel about one another after their parents have passed away. Many families have been irreparably torn apart over money issues that the parents overlooked the advice to document their intentions and expectations before they died.

I help clients prepare for their unexpected death or disability. Using legal documents such as Wills, Trusts, Power of Attorney, LLCs and more, we can ensure that your hard-earned assets go to the right people, at the right time, and in the right way–and are managed by someone who is competent, skilled and trustworthy.

I also help clients identify their non-monetary legacy (values, wisdom, principles, beliefs, life experiences, family name and a commitment to certain charitable causes) and how to effectively pass that legacy on to family and others.

Take time to consider the value of your life to others. Don't miss opportunities to leave a greater legacy than just money.